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Falling to the back of the pack

The regional recovery will lag further behind others in the emerging world in the coming years. The Omicron-led surge in virus cases presents a risk to growth in the near term, but we suspect that the economic hit will be small. Larger drags will come from the unwinding of fiscal support and further monetary tightening in response to high inflation. Our rate forecasts are generally more hawkish than the consensus. Falling commodity prices will also weigh on growth in the region, and will cause current account balances to deteriorate, with external positions in Chile and Colombia looking increasing shaky. Lingering fiscal and political risks will keep local financial markets under pressure in much of Latin America, particularly ahead of elections in Brazil and Colombia this year.
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Latin America Economics Weekly

Chile’s new constitution, Brazil’s improving finances

Some of the doubts over Chile’s political system have eased after the Constitutional Convention completed a draft of the new charter, but political risks remain high for now, which may keep the peso on the backfoot in the coming months. Elsewhere, while the Brazilian government’s budget deficit has continued to narrow, we don’t think the country’s fiscal troubles are over for good. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.

20 May 2022

Latin America Data Response

Chile GDP (Q1)

The 0.8% q/q contraction in Chile’s GDP in Q1 suggests the economy is coming back down to earth after a stellar 2021, and there is a growing chance of a recession this year. Meanwhile, the current account deficit widened to a worryingly large 7.3% of GDP, making the economy especially vulnerable to a further tightening of external financial conditions.

18 May 2022

Latin America Economics Update

Colombia’s economy to beat expectations this year

The solid 1.0% q/q rise in Colombia’s GDP in Q1 suggests the economy came through the Omicron virus wave in good shape and, given the recent surge in oil prices, we expect above-consensus growth of 6.0% this year. That said, a possible victory for interventionist Gustavo Petro in the upcoming presidential elections may weigh on investment and growth further ahead. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

17 May 2022

More from Latin America Economics Team

Latin America Chart Book

Omicron may hinder already weakening recoveries

Recoveries across Latin America have lost momentum in Q4 even though, unlike in other regions such as Europe, new COVID-19 cases generally remain low and containment measures are still light-touch at this stage. The situation could get worse if the Omicron variant takes hold. One reassuring sign is that vaccine coverage continues to improve across much of the region, particularly in Chile and Uruguay which have world-leading booster programmes. But the rollout of third doses has barely got off the ground in the likes of Mexico, Colombia and Peru, suggesting these economies are most vulnerable to a renewed flare-up in virus cases and fresh lockdowns.

22 December 2021

Latin America Chart Book

Political storm clouds lifting for investors…for now

Political developments in Latin America have generally turned in investors’ favour this month. Right-wing José Antonio Kast beat his left-wing rival, Gabriel Boric, in the first round of Chile’s presidential election which buoyed local markets. Elsewhere, the Peronists’ heavy defeat in Argentina’s legislative elections points to more market-friendly policymaking there. However, political risks still linger across the region. The fractured nature of Chilean politics and uncertainty over the new constitution may weigh on investor sentiment, while the Argentine government has a long way to go to win over markets. Meanwhile, fears over populist shifts will persist in Brazil and Colombia ahead of elections next year. Taken together with our view that growth will slow and commodity prices will fall (further), we remain downbeat on the outlook for Latin American financial markets.

24 November 2021

Latin America Chart Book

Fiscal risks in the spotlight

The growing likelihood that Brazil’s government will circumvent its spending cap adds to broader signs that austerity is becoming politically difficult to implement across the region. For instance, Ecuadorian President Lasso recently U-turned on a plan to reduce fuel subsidies after facing the threat of protests. That echoes the decision by Colombia’s government to dilute tax hikes after mass demonstrations there earlier this year. With a busy electoral calendar approaching (e.g. in Chile, Colombia and Brazil), it seems unlikely that policymakers will push through the (harsh) austerity needed to reduce public debt risks. This feeds into our view that financial markets will come under further pressure across much of Latin America.

26 October 2021
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